New Zealand ETF Down Slightly After RBNZ Intervention News

The iShares MSCI New Zealand Capped Investable Market Index Fund (NYSE:ENZL), the lone ETF devoted exclusively to New Zealand, is trading modestly lower Wednesday after Reserve Bank of New Zealand Governor Graeme Wheeler confirmed the central bank has been intervening in the foreign exchange market.

Wheeler made the comments before New Zealand's parliament during Wednesday's Asian session, marking RBNZ's first public admission of currency intervention in six years. ENZL, which will celebrate its third birthday in September, has fought off one of New Zealand's top economic hurdles, that being a strong currency, to gain about 12 percent year-to-date.

While the $200.7 million ETF does not feature a currency hedge, a fair chunk of the ETF's 22 holdings are focused heavily on New Zealand's domestic economy. Not only has the economy there been robust, but the tilt toward the domestic economy has helped ENZL move higher even as the New Zealand dollar, also called the kiwi, does the same. Additionally, the ETF has performed admirably despite New Zealand's intimate trading relationship with China. China recently surpassed Australia as New Zealand's largest trading partner.

Still, there are kiwi-related risks to ENZL going forward. Given the performance of Japanese and U.S. equities this year, it is clear that global investors love stocks in countries addicted to quantitative easing. However, some investors have put money to work in non-easing countries with Australia and New Zealand being among the top choices.

A preference for ENZL or New Zealand equities is not the risk. The risk is the kiwi, which has been the second-best developed market currency against the U.S. dollar since the financial crisis, trailing only the Australian dollar. The kiwi is lower against the greenback today than it was a month ago, but previous currency interventions by global central banks have gone this way: Successful right off the bat followed by waning enthusiasm and a higher currency.

Those hoping for an interest rate cut out of RBNZ arguably need to hope for a property bubble in New Zealand. The central bank has voiced concern over rising housing prices, but if that bubble bursts, the impact could be hard on ENZL, an ETF that devotes over a third of its weight to materials and industrials stocks.

Additionally, RBNZ has previously said it wants to hold rates at 2.5 percent this year with an eye toward an increase early next year. Quantitative easing? Forget about it. Wheeler considers it a source of pride that New Zealand has not eased.

All of that is to say if RBNZ's efforts to weaken the kiwi fail, two other ETFs in addition to ENZL are worth a look. The WisdomTree Australia & New Zealand Debt Fund (NYSE:AUNZ) holds bonds Australian or New Zealand dollars. More importantly, it gives investors exposure to Australia's AAA credit rating with an embedded income yield of just over three percent. AUNZ has an effective duration of almost 4.1 years.

Australia's rate cut announced Tuesday combined with news of New Zealand's intervention scheme should be dreadful news for the PowerShares DB G10 Currency Harvest Fund (NYSE:DBV), but those headlines may be creating a buying opportunity in the "carry trade ETF." DBV holds short positions in the yen (a fine idea), the Swiss franc and the euro, which is another good idea given that the European Central Bank is open to more rate cuts.

DBV's long positions include the Aussie and the kiwi, which have the potential to continue moving higher as investors look for high-yielding developed market currencies, a list that is already small in number.

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